Cyprus faces growing pressure to reform its property tax system as part of the government’s forthcoming tax overhaul.
Economists, including the IMF, argue that the island’s low property taxes and generous developer incentives are fuelling inequality, overheating the housing market, and damaging the environment.
Why property tax reform is needed
Cyprus collects less than 2% of total tax revenue from property, compared with an EU average of 4.7%. Fiscal experts say this under-taxation deprives the government of a stable revenue source that could support public services and infrastructure.
Property taxes are also viewed as among the least harmful to economic growth, making them a logical target for reform. A more progressive tax system would help reduce widening wealth and generational inequality.
Foreign demand fuelling housing pressures
Low taxes and generous incentives have made Cypriot real estate highly attractive to foreign investors. Demand for luxury apartments from overseas buyers has surged, pushing up prices and leaving many local residents, especially younger people, locked out of the housing market.
Countries such as Spain, Portugal, and Italy are already moving to raise taxes on foreign property purchases. Experts suggest Cyprus should follow suit and tighten its Golden Visa rules to ensure fair taxation and proper oversight.
Developers’ tax breaks under scrutiny
The housing crisis is not only about foreign demand. Property developers enjoy significant tax advantages, such as the Notional Interest Deduction (NID) that can reduce corporate tax rates to just 2.5%, and a reduced 5% VAT on new homes used as primary residences.
While the government plans to lift the corporate tax rate to 15%, it is also maintaining several incentives that mainly benefit large developers and foreign professionals. Critics warn that these policies encourage the construction of high-end properties rather than affordable homes or social infrastructure.
Time for a critical property tax review
To address the housing crisis, inequality, and economic inefficiencies, Cyprus must reassess its entire property tax and incentive framework. Policymakers should aim to:
- Reintroduce progressive property taxation at realistic market values.
- Tighten controls on foreign property purchases.
- Scale back excessive developer and corporate tax incentives.
- Redirect investment towards affordable housing and essential infrastructure.
Such changes will take time, especially as property values require updating, but they are essential for a fairer, more sustainable economy.
The bottom line
Cyprus’ current property tax regime favours developers and foreign investors at the expense of local residents and long-term economic health. A fairer, greener, and more balanced tax system could help the country tackle its housing crisis and build a more inclusive future.
This summary is based on an article by Leslie G. Manison, first published in Stockwatch. Mr Manison is an economist, specialising in macroeconomic policy analysis and international financial relations. He is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus Ministry of Finance, and a former senior advisor in the Central Bank of Cyprus.
